Why our bankers are like Gabbar Singh

Gabbar Singh, the famous dacoit from Sholay - the film that captured the imagination of India in 1975 - may be dead but his teachings live on.

The ruthless dacoit had no qualms about getting rid of his own men (recall the classic: Saalaa bach gaya). And Gabbar was fearless (Jo dar gaya, so mar gaya).

Indian bankers are the Gabbar Singh of today. Like Gabbar, they sense the macro opportunity of a vacuum. In Gabbar's reign there were few cops to challenge him and he could rule the ravine. With no legitimate law enforcement, Gabbar was the law. No one could touch him but he could knock off anyone, even members of his own gang.

Our banks know the great macro story that gets harped from North Block to Mint Street: India needs more banks. Of the 600,000 clusters of population in the country, about 5% (30,000 clusters) have access to the bank account. In their desperation for "financial inclusion" the overseers of the banking system may be willing to look the other way when it comes to this acceleration towards "inclusion". The policemen abandon their posts?

The CobraPost sting operations showed the hollowness of the KYC process in the savvy private sector Indian banks, the stodgy PSU banks, and the slick foreign banks.

A bank is the first line of defence in a society that wishes to curb or eradicate black money. Yet, the officials from the many banks are happily offering ways to cleanse black money to white.

The first reaction of the RBI - from Deputy Governor K. C. Chakrabarty - on March 21 was nothing has happened "as no transaction had taken place...Our system to monitor money laundering is perfect". It is possible that the RBI made this knee-jerk statement (without any inspection of the banks' books) to eradicate any thoughts that the Indian banking system was as vulnerable as the Cyprus banking system. Cyprus banks had just been shut down, albeit for very different reasons. In light of the global panic at that point in time, let's accept this statement as a reassuring lie rather than a falsehood.

By June 10, the RBI had imposed a fine of Rs 5 crore on Axis Bank, Rs 4.5 crore on HDFC Bank, and Rs 1 crore on ICICI Bank. These fines were placed after the RBI had time to examine the cases and the RBI "came to the conclusion that some of the violations were substantiated and warranted imposition of monetary penalty".

The share prices of the banks increased after the announcement of the quantum of the fines.

In an article on June 6, The Hindu quoted Rajiv Takru, the Department of Financial Services Secretary, Government of India, as saying that the fine should be Rs 500 crore. The RBI Governor D. Subbarao said that the fine of Rs 1 crore (apparently limited by an act of Parliament) was "peanuts". According to The Hindu, Deputy Governor Chakrabarty reportedly held his ground and said that banks (which have profit making as an objective) could start passing the fines to their customers in the form of higher fees and interest rates. According to him the purpose of a fine should be to "name and shame" the banks found guilty.

Gabbar is alive - and expanding

So, Gabbar had six bullets in his gun and three of his henchmen to knock off.

The banks have already knocked off the employees who were caught in the CobraPost sting operation. Saaley nahi bache.

The fines have been paid and the dust of a bad name has been washed off. The path to provide financial inclusion is laced with bonus packages for the CEOs and senior managements of the banks. They will continue to take the risks in their "bania ka hisaab kitaab hai" attitude. Reputation is an ESOP fattened by a wholesome market cap

There is fee income to be earned from mis-selling mutual funds, mis-selling insurance products, and acting as alchemists who can convert black to white.

They know that the regulators are scared to stop them from opening new branches because, god forbid, if they do stop bank expansion the financial inclusion dream will be in jeopardy. The "social objective" will be lost. So the money laundering machines will spread across India.

And they know that the bank fines will be of the "peanuts" variety. Neither the RBI nor the Independent Board Members are going to touch their salaries, their bonus pools, and their ESOP plans (Hint: maybe they should!).

So, the banks have once again proven they are too big to be fined, too big to be punished, and too important to be held back. The moral hazard is not on their heads, it has been transferred to the lap of the regulators.

Banking was a boring business.

But a lot has changed since Gabbar Singh took over. Now the banks are built to take risks and shed all fear of a serious reprimand. If "naming and shaming" had any relevance to the society we live in, most Indian industrialists (and many in the financial services industry) would be fakirs by now wandering aimlessly across the Indo-Gangetic plain in search of the mystical. Instead, they are surrounded by the material with some CSR to sprinkle around.

Which gets back to the other famous Gabbar quote: "Jo dar gaya, so mar gaya".

With no dar in the system, the mad expansion of bank branches will continue.

The mar will be for us.

The above is from "The Honest Truth" written by Ajit Dayal, CEO of Equity Master.